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Microsoft Cloud Drives Record Fourth Quarter Results

Microsoft Corp. today announced the following results for the quarter ended June 30, 2018, as compared to the corresponding period of last fiscal year:

  • Revenue was $30.1 billion and increased 17%
  • Operating income was $10.4 billion and increased 35%
  • Net income was $8.9 billion GAAP and $8.8 billion non-GAAP
  • Diluted earnings per share was $1.14 GAAP and $1.13 non-GAAP

“We had an incredible year, surpassing $100 billion in revenue as a result of our teams’ relentless focus on customer success and the trust customers are placing in Microsoft,” said Satya Nadella, chief executive officer of Microsoft. “Our early investments in the intelligent cloud and intelligent edge are paying off, and we will continue to expand our reach in large and growing markets with differentiated innovation.”

The following table reconciles our financial results reported in accordance with generally accepted accounting principles (GAAP) to non-GAAP financial results. Additional information regarding our non-GAAP definition is provided below. All growth comparisons relate to the corresponding period in the last fiscal year.

Three Months Ended June 30,
 ($ in millions, except per share amounts) Revenue Operating Income Net Income Diluted Earnings per Share
2017 As Reported (GAAP) $25,605 $7,682 $8,069 $1.03
Restructuring Expenses 306 243 0.03
2017 As Adjusted (non-GAAP) $25,605 $7,988 $8,312 $1.06
2018 As Reported (GAAP) $30,085 $10,379 $8,873 $1.14
Net TCJA Impact (104) (0.01)

2018 As Adjusted (non-GAAP)

$30,085 $10,379 $8,769 $1.13
Percentage Change Y/Y (GAAP) 17% 35% 10% 11%
Percentage Change Y/Y (non-GAAP) 17% 30% 5% 7%
Percentage Change Y/Y (non-GAAP) Constant Currency 15% 24% 2%

3%

GAAP results include a net benefit of $104 million related to the Tax Cuts and Jobs Act (TCJA) for the three months ended June 30, 2018 and a charge of $306 million related to restructuring expenses for the three months ended June 30, 2017, which are excluded from our non-GAAP results.

Microsoft returned $5.3 billion to shareholders in the form of dividends and share repurchases in the fourth quarter of fiscal year 2018, an increase of 16% compared to the fourth quarter of fiscal year 2017.

“Exceptional sales execution delivered double-digit revenue growth across all segments and strong progress against our strategic priorities, anchored by commercial cloud revenue growing 53% year-over-year to $6.9 billion,” said Amy Hood, executive vice president and chief financial officer of Microsoft.

Revenue in Productivity and Business Processes was $9.7 billion and increased 13% (up 10% in constant currency), with the following business highlights:

  • Office commercial products and cloud services revenue increased 10% (up 8% in constant currency) driven by Office 365 commercial revenue growth of 38% (up 35% in constant currency)
  • Office consumer products and cloud services revenue increased 8% (up 6% in constant currency) and Office 365 consumer subscribers increased to 31.4 million
  • LinkedIn revenue increased 37% (up 34% in constant currency) with continued acceleration in engagement highlighted by LinkedIn sessions growth of 41%
  • Dynamics products and cloud services revenue increased 11% (up 8% in constant currency) driven by Dynamics 365 revenue growth of 61% (up 56% in constant currency)

Revenue in Intelligent Cloud was $9.6 billion and increased 23% (up 20% in constant currency), with the following business highlights:

  • Server products and cloud services revenue increased 26% (up 24% in constant currency) driven by Azure revenue growth of 89% (up 85% in constant currency)
  • Enterprise Services revenue increased 8% (up 7% in constant currency)

Revenue in More Personal Computing was $10.8 billion and increased 17% (up 16% in constant currency), with the following business highlights:

  • Windows OEM revenue increased 7% (up 7% in constant currency) driven by OEM Pro revenue growth of 14%
  • Windows commercial products and cloud services revenue increased 23% (up 19% in constant currency) driven by an increased volume of multi-year agreements and the mix of products that carry higher in-quarter revenue recognition
  • Gaming revenue increased 39% (up 38% in constant currency) with Xbox software and services revenue growth of 36% (up 35% in constant currency) mainly from third party title strength
  • Surface revenue increased 25% (up 21% in constant currency) driven by strong performance of the latest editions of Surface against a low prior year comparable
  • Search advertising revenue excluding traffic acquisition costs increased 17% (up 16% in constant currency) driven by higher revenue per search and search volume

Fiscal Year 2018 Results

Microsoft Corp. today announced the following results for the fiscal year ended June 30, 2018, as compared to the corresponding period of last fiscal year:

  • Revenue was $110.4 billion and increased 14%
  • Operating income was $35.1 billion and increased 21%
  • Net income was $16.6 billion GAAP and $30.3 billion non-GAAP
  • Diluted earnings per share was $2.13 GAAP and $3.88 non-GAAP
  • GAAP results include a $13.7 billion net charge related to TCJA

The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results. Additional information regarding our non-GAAP definition is provided below. All growth comparisons relate to the corresponding period in the last fiscal year.

  Twelve Months Ended June 30,
 ($ in millions, except per share amounts) Revenue Operating Income Net Income Diluted Earnings per Share  
2017 As Reported (GAAP) $96,571 $29,025 $25,489 $3.25  
  Restructuring Expenses 306 243 0.04  
2017 As Adjusted (non-GAAP) $96,571 $29,331 $25,732 $3.29  
2018 As Reported (GAAP) $110,360 $35,058 $16,571 $2.13  
  Net TCJA Impact 13,696 1.75  
2018 As Adjusted (non-GAAP) $110,360 $35,058 $30,267 $3.88  
Percentage Change Y/Y (GAAP) 14% 21% (35)% (34)%  
Percentage Change Y/Y (non-GAAP) 14% 20% 18% 18%  
Percentage Change Y/Y (non-GAAP) Constant Currency 13% 17% 15% 16%  

GAAP results include a net charge of $13.7 billion related to TCJA for the twelve months ended June 30, 2018 and a charge of $306 million related to restructuring expenses for the twelve months ended June 30, 2017, which are excluded from our non-GAAP results.
Business Outlook
Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.
Webcast Details
Satya Nadella, chief executive officer, Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, Carolyn Frantz, deputy general counsel and corporate secretary, and Michael Spencer, general manager of investor relations, will host a conference call and webcast at 2:30 p.m. Pacific time (5:30 p.m. Eastern time) today to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/en-us/investor. The webcast will be available for replay through the close of business on July 19, 2019.
New Accounting Standards
We adopted new accounting standards related to revenue recognition and leases effective July 1, 2017. The prior periods presented here have been restated to reflect adoption of these new standards.
Non-GAAP Definition
Restructuring Expenses. We recorded $306 million of restructuring charges primarily related to our sales and marketing restructuring plan during the three months ended June 30, 2017.
TCJA Impact. We recorded a benefit of $104 million during the three months ended June 30, 2018 and a net charge of $13.7 billion during the twelve months ended June 30, 2018 related to TCJA. As of June 30, 2018, we have not completed our accounting for the tax effects of TCJA. Our net charge is provisional based on reasonable estimates for those tax effects. Changes to these estimates or new guidance issued by regulators may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the tax effects of TCJA will be completed during the measurement period, which should not extend beyond the second fiscal quarter of 2019.
We have provided non-GAAP financial measures related to restructuring expenses and TCJA to aid investors in better understanding our performance. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.
Constant Currency
Microsoft presents constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods. All growth comparisons relate to the corresponding period in the last fiscal year. Microsoft has provided this non-GAAP financial information to aid investors in better understanding our performance. The non-GAAP financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Financial Performance Constant Currency Reconciliation

  Three Months Ended June 30,
 ($ in millions, except per share amounts) Revenue Operating Income Net Income Diluted Earnings per Share
2017 As Reported (GAAP) $25,605 $7,682 $8,069 $1.03
2017 As Adjusted (non-GAAP) $25,605 $7,988 $8,312 $1.06
2018 As Reported (GAAP) $30,085 $10,379 $8,873 $1.14
2018 As Adjusted (non-GAAP) $30,085 $10,379 $8,769 $1.13
Percentage Change Y/Y (GAAP) 17% 35% 10% 11%
Percentage Change Y/Y (non-GAAP) 17% 30% 5% 7%
Constant Currency Impact $549 $450 $279 $0.04
Percentage Change Y/Y (non-GAAP) Constant Currency 15% 24% 2% 3%

 

  Twelve Months Ended June 30,
 ($ in millions, except per share amounts) Revenue Operating Income Net Income Diluted Earnings per Share
2017 As Reported (GAAP) $96,571 $29,025 $25,489 $3.25
2017 As Adjusted (non-GAAP) $96,571 $29,331 $25,732 $3.29
 
2018 As Reported (GAAP) $110,360 $35,058 $16,571 $2.13
2018 As Adjusted (non-GAAP) $110,360 $35,058 $30,267 $3.88
Percentage Change Y/Y (GAAP) 14% 21% (35)% (34)%
Percentage Change Y/Y (non-GAAP) 14% 20% 18% 18%
Constant Currency Impact 1,275 654 569 $0.07
Percentage Change Y/Y (non-GAAP) Constant Currency 13% 17% 15% 16%

 

Segment Revenue Constant Currency Reconciliation

  Three Months Ended June 30,
 ($ in millions) Productivity and Business Processes Intelligent Cloud More Personal Computing
2017 As Reported $8,548 $7,822 $9,235
2018 As Reported $9,668 $9,606 $10,811
Percentage Change Y/Y 13% 23% 17%
Constant Currency Impact $228 $182 $139
Percentage Change Y/Y Constant Currency 10% 20% 16%

 

Selected Product and Service Revenue Constant Currency Reconciliation        

 

  Three Months Ended June 30, 2018
Percentage Change Y/Y (GAAP) Constant Currency Impact Percentage Change Y/Y Constant Currency
Office commercial products and cloud services 10% (2)% 8%
Office 365 commercial 38% (3)% 35%
Office consumer products and cloud services 8% (2)% 6%
LinkedIn 37% (3)% 34%
Dynamics products and cloud services 11% (3)% 8%
Dynamics 365 61% (5)% 56%
Server products and cloud services 26% (2)% 24%
Azure 89% (4)% 85%
Enterprise Services 8% (1)% 7%
Windows OEM 7% 0% 7%
Windows commercial products and cloud services 23% (4)% 19%
Search advertising excluding traffic acquisition costs 17% (1)% 16%
Surface 25% (4)% 21%
Gaming 39% (1)% 38%
Xbox software and services 36% (1)% 35%

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